Webinar: Currency Trade Setups for Major Pairs and Emerging Markets to Start 2010
Date: Thursday, January 14th, 2010
Time: 3:30 p.m. CST (4:30 p.m. EST)
Speakers: Jack Crooks, Black Swan Capital
This webinar event takes an in-depth look at the key fundamentals and technical rationales for why the US dollar has bottomed. In addition, Jack will outline the best intermediate-term trade setups for major pairs and emerging market currencies.

Click here to register for this event at Trader Kingdom …

Maybe Google Knows Something….
Notes from the 2009 Central Propaganda Department in China:

C. Currently, our country’s main internal contradictions (conflicts) are:
i. Mass incidents caused by changes in businesses.
ii. Problems with ex-members of the armed forces. The central government requests: they must be well taken care of, every effort must be made to resolve their difficulties, and it is necessary to prevent them from being used by hostile forces.
iii. Irregularly petitioning for redress. It is the right of citizens to petition higher levels of government; however, using irregular means of petitioning for redress influences social stability.
iv. Large scale mass incidents caused by demolitions and the taking of rural land.
v. Large scale mass incidents caused by serious criminal activity. For example, multi-level marketing schemes and illegal fundraising.
D. The challenges to social stability brought by the widespread use of the internet.

Source: China Digital Times http://chinadigitaltimes.net/china/social-unrest/

“Furthermore, despite optimistic projections of China’s future growth potential, its economy is still beset by numerous imbalances and risks in the medium term. These include persistent and even widening regional economic disparity and rural-urban income inequality, rising social unrest and inter-ethnic conflicts, rampant corruption, and serious economic degradation. An eruption of any or several of these ‘fault lines’ could put a sharp brake on the ascent of the Chinese economy, and as the same time propel the renminibi onto an inordinately volatile trajectory.”

Friedrich Wu, Professor at Nanyang Technological University in Singapore

“Asia is leading the world out of global recession, but the financial crisis may yet have a dangerous sting in the tail – the risk of social unrest as unemployment and inequality rise even as economies recover.

“Fears of widespread unrest last year failed to materialize, and most Asian economies are now posting impressive growth. But unemployment is a lagging indicator, and many political risk consultancies are warning that 2010 may hold nasty surprises.

“’Although we maintain that the crisis has already inflicted its deepest wounds, its impact will continue to be felt throughout 2010,’ the Economist Intelligence Unit said in a report.

“The main downside risks to economic stability this year include asset price bubbles, deflationary pressures, and the danger of ‘an increase in the frequency and intensity of social and political unrest, given increased unemployment, weak growth and impending fiscal austerity measures in many countries,’ the EIU said.

“Much of the risk is concentrated in Asia.

“The EIU rates China in the ‘high risk’ category for social unrest in 2010, upgraded from ‘moderate’ risk in 2009. Also in the high risk category are Thailand, Indonesia, the Philippines, Sri Lanka, Cambodia, Bangladesh and North Korea.”

Andrew Marshall, Reuters

“Although most believe that China’s substantial stimulus package announced earlier this year is being invested in infrastructure, many analysts agree with my perception that most of it is ending up in overheated stock and real estate markets. The Chinese refer to this as ‘stir fried’ markets.

“…Just take a look at China’s ten largest companies which are all state-owned or state-controlled, as are thirty-four of the top thirty-five companies listed on the Shanghai exchange.”

Carl Delfeld, President of Chartwell Partners

“There has been some hope that boosting trade with developing countries, and especially with developing Asia, will result in a new source of net demand. James Kynge said something like this in the Financial Times earlier this week:

Popular narratives sometimes overshoot. One of the latest to outlast its veracity is the conventional wisdom that China’s export engines have been spiked by subsiding consumer demand in the US. This, so the argument goes, leaves Beijing with no option but to spur domestic demand to compensate for lost export revenues.

The telling off-stage action is the recent upsurge in trade with south-east Asia and the “newly-rising economies” of Brazil, Africa and India. Although Chinese trade with these places has historically been limited, it has grown so fast in the past five years that a robust performance in 2010 may be enough to offset any moderate weakness in China’s trade with the US.

“A friend wrote to me to ask what I thought of this possibility, citing Kynge’s article, and my response (with some editing) was:

“The idea that net demand from developing countries can replace net demand from the US is alarmingly widespread, both in China and abroad, and mainly indicates to me a lack of familiarity with the history of developing countries. The developing world excluding China is roughly the same size as the US, so if you want them to replace the US you need the developing world to run trade deficits of roughly equal to 7% of their GDPs.

“Leave aside the huge problem that most developing countries also want trade surpluses and have a stubbornly tough time understanding why they should run deficits in order to help Chinese employment, the historical evidence suggests that just a few years of trade deficits of 2% of GDP will lead to external debt crisis. For example it took the Asian Tigers just a few years of deficits after 1993-94 to run into the Asian crisis. Do Malaysia, Indonesia, Vietnam and so on really want to go through that again? Developing country demand cannot replace the US. Even Europe cannot replace the US. This is an unrealistic hope.”

Michael Pettis, Professor at Peking University

FX Trading – Party on dudes…
Question: Is it a Black Swan event when so many people are already talking about it? No, but the China cheerleaders will say it is so…

DJ Shanghai Stock Index Weekly: Divergence? Stay tuned.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Note from David Newman …

2010 Forecast Issue coming this month … 20+ pages of analysis and charts covering the major and emerging market currency world—key themes and targets.

Currency Investor presents its annual 2010 Forecast for the coming year. Don’t miss this issue as it may be the most important one we write all year.

Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.

Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.

Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to sign up …

Thank you.

All the best,

David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.comhttp://www.foremostforex.com/?p=844 Key News
• BEIJING, Jan 12 (Reuters) - China took its strongest step towards tightening monetary policy on Tuesday as the world’s third-largest economy roars ahead, surprising investors with an increase in banks’ required reserves that rocked global financial markets.
• Greece condemned for falsifying data (Financial Times)
• Insight: Lift rates and think about the savers (Financial Times)

Webinar: Currency Trade Setups for Major Pairs and Emerging Markets to Start 2010
Date: Thursday, January 14th, 2010
Time: 3:30 p.m. CST (4:30 p.m. EST)
Speakers: Jack Crooks, Black Swan Capital
This webinar event takes an in-depth look at the key fundamentals and technical rationales for why the US dollar has bottomed. In addition, Jack will outline the best intermediate-term trade setups for major pairs and emerging market currencies.

Click here to register for this event at Trader Kingdom …

Quotable

“Meanwhile, the rest of the world has to wonder whether it is learning the lessons from Japan’s fall from economic grace. Japan’s experience strongly suggests that even sustained fiscal deficits, zero interest rates and quantitative easing will not lead to soaring inflation in post-bubble economies suffering from excess capacity and a balance-sheet overhang, such as the US. It also suggests that unwinding from such excesses is a long-term process.

“Yet Japan’s experience also has a lesson for quite a different economy. It indicates that when very fast growth begins to slow in a catch-up economy with very high corporate savings and comparably high fixed investment, demand may well prove extremely difficult to manage. This is particularly true if the deliberate promotion of credit growth and asset price bubbles has been part of the mechanism used to sustain demand. And who needs to learn this vital lesson now? The answer is: China.”

Martin Wolf, Financial Times

FX Trading – Lessons to be learned.

Martin Wolf of the Financial Times (quoted above) brings back the common comparison to Japan’s lost decade … in hopes of conveying the similarities between Japan then and the US now.

Yes, the comparison is not new. Several months ago in an issue of The International Economy magazine, I read several responses from economic minds across the globe to the question: Will the US suffer a lost decade?

But even many months before that, when deleveraging dominated markets, the idea had begun circulating. Admittedly, deflation was a bigger concern on the minds of investors one year ago relative to today. Maybe, though, we shouldn’t shrug off the Japan scenario just yet.

On Monday I mentioned attending a discussion on economics and markets hosted by CB3 Financial Group. One of the other attendees mentioned a recent guest on PBS News Hour with Jim Lehrer. The guest basically talked about how the financial system was getting back to business as usual.

And in this case “business as usual” did not mean operating efficiency or normalization, per se, but rather back to the old practices that got everyone into trouble in the first place. You know: the type of stuff that’s prompted cries of much-needed financial regulation.

Robert Reich seems to agree. This article from the Financial Times is making a similar case for financial regulation, suggesting the government needs to come down hard on Wall Street.

Now, are we really that unstable in this nascent, market-led recovery? Well, it’s obvious the economy has not come as far along as the markets. Let’s think about that. Something comes to mind …

Heavy on the newswires today is talk about how the Obama administration plans to slap a $120 billion fee on TARP-assisted companies. Yeah, the whole mess is too ridiculous to even want to discuss in full. I’ll try to lay out the ideas real quick:

- The government took steps to keep the banks from failing
- The public mostly opposed the TARP
- The government talked up the need, and eventual “success”, of TARP
- The public became sick over resurgent banker bonuses
- The TARP will actually turn a loss
- The government must levy a fee to recoup some of the taxpayer-funded bailout

Ok, somewhere along the line the market became reassured that this is a decent enough attempt at fixing the problems and enough of a reason to buy bank stocks. What’s ensued since has been a solid-looking recovery for the stock markets.

Dow Jones Bank Stock Index (black) vs. S&P 500 Index (red) Daily: Bank index is now underperforming S&P after leading for many months.

A disconnect between the economy and the market has become obvious, no doubt. Now the big question: how shall the two reunite?

It seems there are two general answers:

1) The economy plays catch-up.
2) The market takes a double-dip.

I’d say the majority is currently betting on numero uno. But if there’s really a risk of a lost decade in the US, or if there’s really a risk that the financial system is just building itself back up for an encore collapse, then maybe the market does a rethink.

The pressure would really be on China to keep the rest of the world from going belly up. Like Mr. Wolf says, perhaps China, too, can learn a lesson from Japan.

It’s like déjà vu all over again.

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Note from David Newman …

2010 Forecast Issue coming this month … 20+ pages of analysis and charts covering the major and emerging market currency world—key themes and targets.

Currency Investor presents its annual 2010 Forecast for the coming year. Don’t miss this issue as it may be the most important one we write all year.

Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.

Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.

Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to sign up …

Thank you.

All the best,

David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Phone: 866-846-2672

Quotable

“As always, companies and investment banks have no trouble in meeting the new demand. Emerging market IPOs have been running at double the cash value of developed market IPOs, despite the much smaller market scale.

What’s wrong with this picture? Plenty. Academic studies have shown there is no positive correlation between GDP growth and stock market returns – if anything the correlation is slightly negative. Professor Jay Ritter of the University of Florida is the author of one such study ranging over a hundred years of data from sixteen different countries. His conclusion is clear: “Countries with high growth potential do not offer good investment opportunities unless valuations are low.”

The reason for this counter-intuitive finding is that you do not buy shares in the statistical construct known as GDP. You buy the shares of real world companies. In immature fast-growing economies, the companies that end up winning the struggle for survival may not even exist yet. That was certainly so in the case of Japan’s economic miracle. In the 1950s there were more than one hundred motorbike companies. The market leader, Tohatsu, was driven out of business by the cut-throat pricing of a flaky upstart called Honda.”

Peter Tasker

FX Trading – Complacency vs. Risk Aversion Probabilities Seemingly Rising

This morning, writing in the Financial Times, long-time Asian market seer and excellent analyst/writer Peter Tasker tells us most emerging markets are looking dicey, given the overvaluation. The biggest problem flows from the biggest one—China, according to Tasker.

Early last week, emerging markets guru (well deserved we might add for his excellent work over the years) Mark Mobius sounding a similar warning, suggesting EM equities were overdone and the rush of IPOs was not good.

This morning China decided to raise reserve requirements on its banks, hinting of bubbulicioness concerns. Back to Mr. Tasker [our emphasis]:

“So are valuations low enough in the emerging markets to offer good investment opportunities? In less popular areas, perhaps yes. But the bigggest of them all, China, is in a bubble phase. At its 2007 peak, the Shanghai A-share index traded at over 7 times book value, far above the 5 times reached by Japan’s Nikkei Index at its peak twenty years ago.

“Having subsequently halved, Chinese stocks are no longer quite so expensive. However the adjusted ‘Graham-and-Dodds’ price-to-earnings ratio – a time-tested indicator of value which uses an average of ten years earnings – remains at a dizzying 50 times. Compare that with around 15 times in the US, itself by no means cheap in historical terms.

“Residential real estate [in China] appears to be even more overvalued. In bubble-era Japan, a byword for manic real estate speculation, apartment prices peaked out at 12 to 15 times average household income. In major Chinese cities, the multiple is currently 15 to 20 times. Asset market bubbles of any scale and duration usually have their equivalents in the real economy. The biggest distortion in the Chinese economy is the explosion in fixed asset investment to an eye-popping 50 per cent of GDP. By comparison, Japan in its miracle decade clocked up economic growth rates similar to China’s today by investing between 30 per cent and 35 per cent of its GDP.

“Just as there has never been a bubble that hasn’t burst in the end, so there has never been an investment boom that hasn’t been followed by a bust. If China’s investment-to-GDP ratio were to drop to the levels of 1960s Japan – not an absurd idea, since that is also where it was in China ten years ago – the impact would be catastrophic. China itself would face slump and the mother of all banking crises. A domino reaction would hit the commodity exporters and other emerging economies. The deflationary impact of Chinese overcapacity would be felt everywhere, potentially putting the world trading system at risk. And investors would come to view the ‘Bric’ acronym much as they do ;TMT’ today.”

The problem is, betting against a Chinese bust hasn’t been a very profitable thing to do. Like those of us who watched the Nasdaq boom in the late ‘90’s; fading that trend proved consistently deadly even though we knew it would end badly—when it would end was the little wrinkle few figured out. Ditto China. But it could be a mother of a bubble burst when it does. Rising interest rates at the margin, as I talked about recently, have been the catalyst for things like that in the past.

What could keep the music playing longer than expected now, despite rising bond yields? Hot money flowing into China in expectation of some type of one-off revaluation of the currency—yuan (or the even harder to pronounce and spell Remnimbi). But we’ve seen this game before also. We’ve seen plenty of unsuspecting investors sucked into the “exciting” Chinese yuan deposits in expectation of revaluation by questionable institutions extolling said virtues, even though it has proved to be dead money for years as the interest paid is miniscule or zip—fees paid to the institutions by investors are a bit higher, however. No names mentioned in order to protect the guilty.

Maybe its part and parcel to “a firm that never met a politician who couldn’t help jockey it closer to power interests,” aka the Carlyle Group’s decision to pony up closer to China with its new obviously well-connected local currency investment fund. Here’s to hoping Carlyle’s timing is about as good as Blackstone’s venture into real estate; them having taken it off the hands of rich old Sam Zell just in time. Sorry. I should stop wishing bad things for seemingly questionable people. My apologies! It’s yet another New Year’s resolution already gone bad…

To use JR’s title from yesterday, everything is looking hunky dory, the S&P and evaporating volatility is telling us things are indeed hunky dory. Take a look at this picture we shared with our Members yesterday:

You notice the breakout in SPU (black line) from that wedge…just above the 50% retracement level from the pre-credit crunch high to the post-credit crunch low. VIX (red line) is testing its old lows. Extended? We think so!

Complacency rules! And so far it has been very right. But then again nothing new here; very happy campers are the prelude to very frightened campers. It is the way the market is and the way the market has to be. The Tao of markets! I stole that from a man who has forgotten more about currencies and markets than most will ever know, John Percival of the venerable Currency Bulletin. Thanks John for all the wisdom you have shared for many years.

So the currency play that might lead, or at least accompany, a pack of frightened campers out of stocks, here there and everywhere, is likely the EUR-JPY pair; or is it the AUD-JPY pair, or is it….

EUR-JPY (black) vs. S&P 500 Index (red): Is there a bit of divergence there? It does appear so.

Stay tuned.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

“God bless us every one!” said Tiny Tim, the last of all.”

Charles Dickens

FX Trading – Twelve Themes of Christmas (guesses, wishes, and concerns)
1) The dollar has bottomed on a multi-year basis after a major test in 2009.
2) Interest rates are going higher as this recovery “normalizes” in 2010; we see 5% on the 10-year T-note before the year is done.
3) US job growth will be surprisingly strong.
4) There will be a crisis within the Eurozone late in 2010 that will shake the foundation of the euro as a single currency.
5) Asian-block currencies will breakout against the developed world majors and move higher.
6) Extremely tight intermarket correlations will finally begin to breakdown and currencies will be increasingly judged on both fundamentals and yield differentials.
7) Stock market volatility will increase as government backstops disappear. Stocks will initially get hammered on the broader realization the real economy is improving i.e. money flow.
China will continue to rock through mid-year, but at some time during the second half of 2010 it will experience a major financial disruption that will rock markets around the globe.
9) Gold sees $700 before $1,500 (Sorry Dad!)
10) South Africa begins to unravel politically (it intensifies for international consumption) and the rand gets hammered.
11) Russia makes another major incursion west, increasing its “buffer zone;” continuing to pressure Baltic and Central European Currencies.
12) Thank you for reading Currency Currents and putting up with our rants, raves, mistakes, bad calls, and curmudgeon-ness (I don’t think it’s a word but fits well here). We hope we have shared some things good; we know we have received many things good from the amazing quality of people who read CC each day.

Merry Christmas and Happy New Year!

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Note: Currency Currents will publish again on January 4th.

Quotable

“Investment in fixed assets such as factories and the rail network accounted for more than 95 percent of China’s 7.7 percent growth in the first three quarters of 2009 and made up 45 percent of gross domestic product, which is higher than any major economy in history, according to Morgan Stanley Asia Chairman Stephen Roach.”

Bloomberg

FX Trading – Europe Baking its Own Cake
Will the world economy be able to continue its recovery process as global monetary stimulus measures are phased out?

That’s a good question; and I doubt I can sufficiently answer it … except to say that it’s probably a lot easier said than done.

But as far as how currencies might be affected by the withdrawal from stimulus, here’s how Joachim Fels, Manoj Pradhan and Spyros Andreapoulos of Morgan Stanley seem to think the major central banks will fall in line with interest rate moves:

“We expect the beginning of the exit from super-expansionary monetary policies and its implications to be the dominant global macro theme in 2010. We will discuss details of the likely monetary exit strategies across countries in next week’s year-end Global Monetary Analyst. Here, it suffices to say that we expect the Fed, the ECB and the PBoC to move roughly in tandem and raise interest rates from 3Q10, with the Bank of England following in 4Q. Some, like the central banks of India, Korea and Canada, are likely to move earlier, while others, such as Japan, will lag behind.”

Yesterday we sent around a news piece to our paying members that talked about how maybe the excessive stimulus and bailout mentality is returning to the financial system the abnormal risk taking and irresponsible practices that sparked market failure, especially in Europe.

That makes us wonder whether the Morgan Stanley trio’s forecast for the ECB and Fed to move in tandem upon exit is a low probability bet. Based on hundreds of billions of euros in writedowns expected in 2010 and the fact that European banks dominate (as a percentage of assets) the global financial system, we seem to think the ECB may be a bit slower to its six-shooter than the Fed.

But when we make a statement like that – anything that attempts to play up the US as being in a less unfavorable position than one of its counterparts – we’re almost certainly reminded by our readers that the US owes a lot of money to China … and China is going to stop buying US treasuries … Zhou said such and such … or whatever.

Ok, fine – I concede. The US is no model of fiscal discipline. Not by a long shot. But much of that is baked into the cake. And that in and of itself is part of the reason that the items we expect will impact Europe are not already baked into the cake.

Assuming we’re not cutting off our nose to spite our face, then the ECB will lag … and so will the euro as we push through 2010.

EURUSD (black) vs. 10-yr T-Note Futures (red) Weekly:

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Quotable

“A tale of two worlds. We forecast 4% global GDP growth in 2010, but this masks two very different stories. One is a still fairly tepid recovery for the advanced economies. The other is a much more positive outlook for emerging markets, where we forecast output to grow by 6.5% in 2010. In short, we think that the themes of global rebalancing and EM growth outperformance have staying power and have even been bolstered by the crisis.”

Morgan Stanley Global Economic Forum

FX Trading – The yen will take back carry trade crown in 2010!
Any dollar bull story must consist of the Mr. Greenback relinquishing its role as carry trade currency i.e. primary major currency borrowed to fund risky asset and other high yielding investments. The Japanese yen, the all-time carry trade champ, looks like it is about to be anointed once again.

This recent note from the Financial Times Lex column summed it up well [our emphasis]:

“When you run out of things to say, shout. On that rubric, the Bank of Japan [BOJ] is yelling. In spite of holding the record for the consecutive number of years of deflation (seven), the BoJ has said it will no longer ‘tolerate’ falling prices. This is a sop to the government, which wants the central bank to help the economy. Judging by BoJ’s inflation forecasts, negative 1.5 per cent this year, minus 1 per cent next year and a 0.7 per cent drop in 2011, Japan has to tolerate deflation a while longer.

“The alternative is aggressive quantitative easing, a successful Japanese export little practised at home of late. Buying government bonds would help fund the budget deficit. With other central banks talking about exiting QE, however, it would also undercut the yen, which on Friday fell almost a cent. Shout? Somebody heard.”

Among the major currency pairs, we think being long USDJPY in 2010 will be the best single payoff. Key central banks are poised to drain the punch bowl in 2010. But the Bank of Japan will likely be the glaring exception to this rule. Thus, Japanese yen yields remain at enticing carry levels while US rates should be ticking higher across the curve.

USDJPY Weekly:

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Note from David Newman….

Our trading recommendations in our Forex & Currency Futures, Emerging Market Currencies, and Currency Investor services have been racking up some very nice gains lately, as our Members were well positioned for a dollar rally.

If you’ve missed this initial move in the buck don’t worry. We think this is just the beginning of a major trend change which should offer plenty of opportunities to make good money, on both sides of the market. We’d love for you to give our recommendations a try.

Please contact me by email or telephone and I’d be happy to discuss which of our services best fits your needs.

Thank you.

All the best,

David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Phone: 866-846-2672

Emerging Stock Index Daily:

Quotable

“Each thing is of like form from everlasting and comes round again in its cycle.”

Marcus Aurelius

FX Trading – Rising relative yield differential is good for the dollar
Last Friday I penned Growth and inflation? Key to our 10 reasons the dollar has bottomed. I hope you believe me now. One of the key points to the dollar move was “Carry trade idea history.” History we think because the Fed may surprise on the interest rate front; we expect US interest rates on the front end of the curve to exceed anything Japan has to offer soon. In that case, the Japanese yen once again inherits the carry trade mantle. It is one reason why we are bearish on the yen going forward and why our Members are positioned for such a move.

But we also expect relative US growth will exceed its competitors in Europe (and Japan). Relative growth is always a vital prop for any currency and it should be no different when it comes to the dollar in this cycle.

Our case for growth and inflation is a relative calculation. However, the argument, “The Case for Higher Real Yields,” from Richard Berner & David Greenlaw, two excellent economists from Morgan Stanley, provides more than enough meat for our relative US growth and rising rate expectation story. A few excerpts below [our emphasis]:

“We think 10-year Treasury yields will jump to 5.5% by the end of 2010, driven primarily by a rise in real rates to 3% or more. That call is clearly inconsistent with the consensus view of modest growth and declining inflation, and it is light years away from the current level of real TIPS yields at 1.3%. Even those who agree with our somewhat upbeat view of sustainable growth and moderate inflation think that our rate call just does not jibe.

“…Ex ante, investment is poised to increase more than saving; higher rates required to clear market. At first blush, the increased saving that we expect may sound bullish for interest rates. What many fail to appreciate, however, is the extent to which investment outlays will rise over the course of the next year in spite of the rise in rates. Housing, of course, is credit-sensitive, but credit availability and collateral requirements are as important as interest rates. The fact that traditionally measured housing affordability has skyrocketed and yet housing is staging only a modest recovery from a record plunge speaks to the importance of credit availability. Our hunch is that improved availability in the coming year means that housing demand will improve even as rates rise.

“For Corporate America, there is a parallel story. Capital spending plunged in the recession to an unprecedented degree, and new investment is needed to rebuild capital stocks. The ‘accelerator’ of rising output on a sustained basis and improved corporate cash flow will also drive capex higher. Moreover, empirical work suggests that corporate capital spending is relatively insensitive to changes in interest rates. Finally, we believe that companies will shift from a record 10 quarters of liquidation to accumulating inventories by year-end. Combined, this shift to sustainable growth in housing, business investment and inventories will result in a significant increase in private credit demand.

“The upshot is that the necessary balance between rising saving and rising net investment is unlikely to occur at today’s interest rates. Finally, two other factors are expected to lift real interest rates. First is a repricing of the likely path for short-term interest rates. Currently, fed funds and eurodollar futures are pricing in a 90bp move up in rates by year-end 2010, and a cumulative move by year-end 2011 of about 200bp - less than what we expect through year-end 2010. As a result, we think the market has more repricing of the yield curve to do. Second, uncertainty over fiscal credibility and inflation will lift term premiums and likely add to the looming pressure on real yields.”

If we compare the yield curve of the US to the Eurozone, you can see that yield advantage in Europe is only on the front end of the curve. Already US yields for beyond 5-yr benchmarks are ahead of the Eurozone.

US (black) vs. Eurozone (red) Yield Curve (spread difference green at bottom):

Our bet is the problems in the Greece and increasing expectations of a deceleration in German growth means the US sooner than later shows a yield advantage across all terms of the yield curve. And if Mr. Berner and Greenlaw are correct about a 5.5% 10-year yield by the end of 2010, the yield advantage favoring the US could be big!

10-yr US Benchmark Yield (black) and US$ index (purple) Weekly: The last time we saw a 5.5% yield was back in May 2001; incidentally the US $ index (purple line left axis) was near 120).

Have a great weekend.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Note from David Newman….

Our trading recommendations in our Forex & Currency Futures, Emerging Market Currencies, and Currency Investor services have been racking up some very nice gains lately, as our Members were well positioned for a dollar rally.

If you’ve missed this initial move in the buck don’t worry. We think this is just the beginning of a major trend change which should offer plenty of opportunities to make good money, on both sides of the market. We’d love for you to give our recommendations a try.

Please contact me by email or telephone and I’d be happy to discuss which of our services best fits your needs.

Thank you.

All the best,

David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Phone: 866-846-2672

Quotable

Rise, brothers, rise; the wakening skies pray to the morning light,
The wind lies asleep in the arms of the dawn like a child that has cried all night.
Come, let us gather our nets from the shore and set our catamarans free,
To capture the leaping wealth of the tide, for we are the kings of the sea!

No longer delay, let us hasten away in the track of the sea gull’s call,
The sea is our mother, the cloud is our brother, the waves are our comrades all.
What though we toss at the fall of the sun where the hand of the sea-god drives?
He who holds the storm by the hair, will hide in his breast our lives.

Sweet is the shade of the cocoanut glade, and the scent of the mango grove,
And sweet are the sands at the full o’ the moon with the sound of the voices we love;
But sweeter, O brothers, the kiss of the spray and the dance of the wild foam’s glee;
Row, brothers, row to the edge of the verge, where the low sky mates with the sea.

Sarojini Naidu, The Coromandel Fishers

FX Trading – Good On the Dollar

Well, this is something we haven’t exactly seen in a while. The US dollar is making good on positive fundamental developments; granted it’s being helped along a bit by ongoing worries in Greece.

In case you missed it, another credit rating downgrade of Greece has pressured its bonds, the spread between 10-year Greece and German government bonds has widen to 269 basis points. We haven’t seen anything that wide since April … and the record during the euro’s existence sits a tad bit north of 300 basis points.

But back to the buck … I was a bit surprised yesterday when the buck reacted well to the FOMC rhetoric. I figured the Fed would do as it normally does and try its hardest not to say anything that would spook equity markets. Though I expected traders who’d bid up the dollar on the sooner-than-later interest rate expectations would come away disappointed. Instead they keyed on the slight change in wording which revealed an optimistic tone on the recovery potential for the US … and they didn’t go running from the buck.

So instead of wiping away some of its recent gains, the dollar stood strong and hasn’t looked back … as all the majors save the Japanese yen are down more than 1% so far today. This rates a look at the weekly chart of the US dollar so we can get a better understanding of the magnitude of this move:

Last week is when this index broke above its downtrend; this week its confirming that move. While it’s overcome nearer-term resistance this week, there is an area of price congestion – several points of previous support and resistance – just above 78 that could slow this move down somewhat. Something to keep an eye on anyway.

Perhaps more important though, can investors really believe in the US dollar? As with so many countries, especially in Europe, the US needs to get its fiscal house in order. The US consumer likely needs to make some sort of comeback, perhaps not a return to pre-crisis mentality but at least stabilizing at a level that spurs economic activity in the US. And that’s likely not going to happen until jobs take a decisive turn upward. The latest NFP was a good step, but its only one step. And not to mention, we’d have to see the consensus get over the stigma around the Fed keeping rates abnormally low for so long and the potential for that to create inflation and wreck the dollar.

But for now traders and investors might actually want to believe (and that will help), though it’s going to take a lot more for sentiment to shift for the long-term.

And as long as traders and investors are losing confidence in the Eurozone’s ability to keep it together, it will buy some time for the US to keep rebuilding. A long-term dollar bottom is something that will likely gain some credibility as the year winds to a close.

But for those who are not ready just yet to throw in the towel and go long the dollar, you can take solace in the fact that maybe this move is just a much needed correction. Maybe it’s just a reprieve after several calls by global central banks that rising currencies are putting their respective recovery at risk. Maybe this is just a year-end book-squaring thing that’s driving asset markets, especially the dollar.

But maybe not – US stocks are holding up at the same time that the dollar is making its strides. That’s not typical of risk appetite capital flows. A look at a chart of the Shanghai SE Composite index and the S&P 500 index might confirm this is a US-centric story:

China shares rolling over?

Last time a change in correlation between crude oil and the US dollar foreshadowed a massive dollar rally. Should we take note of this change of correlation between US stocks and the dollar?

Why not, right?

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Interview with a “Maniac” commodities trader this month…

Our special “trader” interview section of Currency Investor this month features our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We think you’ll appreciate Kevin’s insights; we certainly did.

Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.

Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …

Quotable

“People such as George Soros and Michael Moore certainly talk a good game, but the next Mother Teresa they are not. Mother Teresa never criticized the free-market system; wealth just wasn’t for her. Soros and Moore are quite the opposite. They will never take a vow of poverty and dedicate themselves to helping the poor. They just want our civilization to take a vow of poverty and become poor.

This has caused many to wonder: How can someone preach socialism while being the most rapacious “capitalist” imaginable?”

Selwyn Duke, The Pathology of the Rich Socialist

FX Trading – Monetary Policy and Emerging European Currencies

So we’ve been harping on the rising concerns in Europe and what they may ultimately mean for the euro. But it’s clear that the worries are not confined to the EMU. Yesterday traders put a hurting on the Hungarian forint, the Polish zloty and the Czech koruna.

US Dollar vs. Hungarian Forint

Yesterday’s move amounted to more than a 2% move in this pair, though so far this morning the forint is recovering some lost ground.

For Hungary in particular, there’s been a steady stream of bad news for their economy and recovery prospects. Adding to the weak fundamentals for the forint is the current stance by the country’s central bank. They are expected to cut rates yet again when they conclude a policy meeting this Friday. And there’s quite a mix between what neighboring central banks are doing; and it’s even quite different from the latest expectations of the Federal Reserve.

The Czech National Bank just today cut rates to a record low of 1%.

Sweden’s Riksbank just announced they will stay on hold; rates will go unchanged for the foreseeable future.

Poland’s central bank is expected not to budge on interest rates either when they meet next week.

Norges Banks, however, is behaving differently. Today they hiked rates by 25 basis points. And this wasn’t the first in a while; they raised rates at their last meeting. Overall, this helps to make the Norwegian krone an attractive investment among handful of Emerging European currencies that are lagging far behind in the fundamental category.

But as stable a footing that Norway seems to have, the krone is not immune to risk-aversion capital flow. It too got hit pretty hard yesterday; just not nearly as hard as the forint. Which brings me to the US dollar and the Federal Reserve …

The Federal Open Market Committee announces its latest intentions with interest rates when they conclude their meeting this afternoon. There’s always a decent amount of attention given to this decision, even if nothing much is expected from it. That’s how the last several meetings have gone when there’s been no reason to expect a departure from the “rates will remain low for an extended period of time” line.

But, this time is a bit different.

There have been three reasons so far to give traders some incentive to pay close attention to the FOMC announcement today:

1) Positive surprise from November US Nonfarm Payrolls
2) Positive surprise from a preliminary retail sales report
3) An eye-catching uptick in inflation via the Producer and Consumer Price Indices

What will this all amount to? Not much.

The Fed is definitely not ready to raise interest rates; and they’re probably not even ready to talk about raising interest rates. There’s simply too much work left to be done saving the economy, as they see it.

If there is any change to their rhetoric it is probably to appease those looking for the Fed to acknowledge they’re paying attention to new data. But ultimately they’ll say plenty of risks still remain and they won’t risk choking off the economic recovery by lifting rates too soon.

This announcement is all about rhetoric, as they almost always are. Because frankly a move higher, towards say 1%, probably won’t choke off recovery. But if it’s perceived that way then it may not matter.

The Fed is still doing a lot of handholding; and one of those hands belongs to the market.

I’d be cautious about expecting anything hawkish from the Fed that might bolster the US dollar today. But it will be interesting to see, in the days ahead, if the economy continues to show signs of improvement, whether the US dollar will maintain its recent strength.

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Interview with a “Maniac” commodities trader this month…

Our special “trader” interview section of Currency Investor this month features our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We think you’ll appreciate Kevin’s insights; we certainly did.

Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.

Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …

Quotable

“Even if the Fed’s forecast is accurate this time around — and that’s a big if — the road to neutral is dotted with potholes. For starters the Fed has a $2 trillion balance sheet that will have to be unwound without drawing too much attention to asset sales lest it incur politicians’ wrath.

“The liquidation of the $1.25 trillion of agency mortgage- backed securities the Fed is acquiring will raise yields on both the MBS and the underlying mortgages. Members of Congress never let anything stand in the way of a home purchase, including the ability to service the debt.”

Caroline Baum

FX Trading – Centered on Eurozone

I am looking around this morning and there are all kinds of economic tidbits and news stories that, in isolation, could prove meaningful. But one item is particularly catching my attention … and everyone else’s, it seems.

The euro is down more than 100 PIPs as I write and it’s helping lead the way sharply higher for the US Dollar Index. The chart below seems to reveal a pretty convincing break of the daily downtrend reaching back to March. While the element of uncertainty in the markets has shaped up nicely for the buck, there is a bit of technical resistance just ahead that could slow down this move a bit:

But even if the bullish dollar takes a breath, could sentiment make a permanent shift in favor of the US dollar?

That’s a tough question to answer, and one in which the majority of respondents would firmly say ‘No!’ So we’ll leave that simmering for now and look a little bit more short-term.

Yes, we’ve seen two numbers in the US — November Nonfarm payrolls and preliminary retail sales – surprise many traders and dare those to ask: is the US recovery getting its feet planted?

There I would also say it’s too early to tell; though my gut has me leaning towards ‘no’ … or at least not yet. The fairy-tale version of economic growth that I relate to “recovery” is a long ways off.

There is still bickering going on about banks not lending money, about the potential for interest rates to raise and throw another hip-check on the bruised and beaten US homeowner. And when the Christmas season has come and gone, we may be unpleasantly surprised with the US consumer’s actual appetite for stuff.

And turning to Europe, things obviously aren’t much better. While it’s no small task, at least the US only has to drag one country out of recession; the Eurozone isn’t as fortunate.

We’ve talked about the threat Greece poses to the European Monetary Union; Ireland, Portugal and Spain are all experiencing their own difficulties. Recently there’s also been news concerning Austria’s banks – they just nationalized Hypo and they’ve put another major bank on a watch list. And in the meantime, Germany, in far better shape than the rest of the Eurozone members, is still finding rough patches and is experiencing some headwinds on its path toward recovery. It’s quite a handful for the European Central Bank who’s tasked with determining an appropriate one-size-fits-all interest rate.

Needless to say this dynamic has become a major obstacle for the euro; traders seem to be realizing that its meteoric rise since March is not exactly justifiable.

Just a friendly reminder …

Plus, we are spotlighting the euro in our monthly Currency Investor newsletter that is due out today. You can get more information on it below …

Thanks.

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Interview with a “Maniac” commodities trader this month…

Our special “trader” interview section of Currency Investor this month will come from our friend Kevin Kerr. He is the proprietor of Kerr Commodities Watch. Kevin is a frequent guest on every business show imaginable sharing his excellent views on all things commodities. We are looking forward to hearing Kevin’s insights.

Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.

Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …